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NewsJulia Irvine
24 Dec 2018 11:03am

SEC fines Crowe over significant audit failures

The US member firm of Crowe Global has agreed to pay a $1.5m (£1.2m) penalty to the US Securities & Exchange Commission for failing to flag “pervasive fraud risks” during its 2013 audit of Corporate Resource Services

Two Crowe partners – engagement partner Joseph Macina and engagement quality reviewer Kevin Wydra – were fined and suspended from working on publicly listed company financial reporting and auditing for three years and one year respectively.

Two partners of the now defunct audit firm, Rosen, Seymour, Shapps, Martin & Co (RSSM), Mitchell Rubin and Michael Bernstein, who worked on the 2012 audit, were suspended indefinitely.

Corporate Resource Services collapsed in 2015 following the discovery of around $100m in unpaid federal payroll tax liabilities. According to the SEC, Crowe LLP’s audit team had identified fraud risks during the audit but had failed to carry out proper procedures designed to unearth the undisclosed payroll tax liabilities.

Nor did they not properly identify and audit the company’s related party transactions or obtain adequate appropriate audit evidence to respond to these fraud risks, support recognition of revenue and otherwise support the audit opinion.

Furthermore, they failed to evaluate substantial doubt about the company’s ability to continue as a going concern, or to conduct a proper engagement quality review.

The SEC also found that the firm had a continuing direct business relationship with Corporate resource Services and so was in breach of the independence rules.

Even though Crowe’s national office was aware that the audit engagement was extremely risky and it was difficult to obtain appropriate evidence, it did not ensure that the audit deficiencies were resolved. In fact, the SEC order holds Macina and Wydra responsible for Crowe’s audit failures.

As far as the RSSM partners were concerned, the SEC states explicitly that the pair “engaged in fraud and performed a highly deficient audit of Corporate Resource Services’ 2012 financial statements, which amounted to no audit at all”.

Bernstein, it add, failed to comply with the requirement to rotate the partners, as a result of which the firm was in breach of the independence rules.

“The audit standards are designed to ensure that public accounting firms have reasonable procedures to identify and respond to illegality and issues that pose material risks to the integrity of an issuer’s financial statements,” said Anita Bandy, associate director in the SEC’s division of enforcement.

“As set out in our order, the pervasive audit failures of Crowe and these accountants left investors with a misleading picture of Corporate Resource Services’ financial condition.”

In addition to the fine, as part of the settlement, Crowe has agreed to be censured and to bring in an independent compliance expert to review its audit policies and procedures.

Macina, Rubin and Bernstein were fined $25,000 each and Wydra paid $15,000. All four settled the SEC’s case without admitting or denying the findings.